FAQs ON PRODUCER COMPANIES - ICSI · Companies Act 1956 shall be applicable mutatis mutandis to...

FAQs ON

PRODUCER COMPANIES

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NOVEMBER 2017

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THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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Printed at : Chandu Press/100/November 2017

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PREFACE

“Agriculture is our wisest pursuit, because it will in the end contribute mostto real wealth, good morals and happiness.”

The above words of the erstwhile American president, Thomas Jefferson holdtrue not just in the context of the United States but on a global level and that tooeven after 200 years of having put out. As far as the Indian scenario isconcerned, the relevance is even greater considering the fact that the Indianmainland has primarily been considered an agrarian economy. The farmers ofthe country have witnessed a long struggle on a variety of fronts ranging fromstifling competition in global markets to prices yielding lower profit margins,imports leading to major setbacks in business, so on and so forth; the listseems endless.

It is this elongated list of pressing issues that had led to the evolvement of theconcept of ‘producer company’; an institution structured primarily to channelizeand govern the business activities of farmers and agriculturists, who couldcollectively be referred to as ‘producers’. The idea was to allow farmerscooperatives to function as a corporate entity under the Ministry of CorporateAffairs. Providing these companies with a legal framework, the CompaniesAct, 1956 provided defined to not just ‘Producer’, ‘Producer Company’, or‘Producer Institution’, but it laid down, in detail, the objectives of such companiesas well, bringing a host of activities under its garb. However, even after beingput in place for more than half a century, the laws need elucidation andexplanation.

Understanding this gap and with an intent to fill it, the Institute of CompanySecretaries of India has prepared this handbook titled ‘FAQs on ProducerCompanies’. The publication aims to elucidate the law in line with the practicalissues facing the professionals as have been brought before the Institute in theform of queries through dedicated e-mail for the purpose, while covering topicsrelated to law and procedures regarding formation and registration,management and administration, share capital and member’s rights, accounts,audit, loans and investments of producer companies.

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I place on record my sincere thanks to CS Tushar Santosh Tendulkar andAdvocate Sujay Pramod Joshi, Company Secretaries in practice for writing themanuscript of this publication.

I place on record my sincere thanks to CS Shamalee Vaze, Company Secretaryin Practice and CS Makarand Lele, Vice President & Central Council Memberfor their valuable inputs while reviewing the draft of this publication. I alsocommend the dedicated efforts of CS Deepa Khatri, Deputy Director, in finalizingthe publication with the able guidance of CS Samir Raheja, Director and CSBanu Dandona, Joint Director in the Directorate of Corporate Law andGovernance, ICSI.

I am confident that this publication will be of practical value not only for members,practitioners and students but other stakeholders as well. However, consideringthe fact that there is always scope for improvement, I would personally begrateful to readers and users for their suggestions/comments for bringing aboutfurther refinement in this publication.

CS (Dr.) Shyam AgrawalPlace: New Delhi PresidentDate : 16th November, 2017 The Institute of Company Secretaries of India

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C O N T E N T S

Producer Companies – An Option to Function Co-Operatives as 1Companies

Formation and Registration of Producer Company 9

Management and Administration of Producer Companies 13

Share Capital and Members Rights 23

Accounts, Audit, Loans and Investments 25

Pg. No.

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PRODUCER COMPANIES – AN OPTION TOFUNCTION CO-OPERATIVES AS COMPANIES

1. What is the historical background of producer companies in India?

Producer Companies as an Institution have been conceptualised and structured,taking into the considerations of farmers, agriculturists (termed as ‘Producers’),with a view that the business activities relating to agriculture, be channelized andgoverned in a formal manner. Part IX A was introduced in the Companies Act,1956 by the Companies (Amendment) Act, 2002, which consists of Chapters I toXII, covering Sections 581A to 581 ZT, encompassing the provisions of producercompanies. The Policy makers realised that, inspite of India being an AgrarianEconomy since ages, formalisation and good governance have not even touchedthe Agricultural Sector. The challenges faced by primary producers, farmers dueto their limited asset and capital base, climate issues, mobilisation of resources,issues relating to agricultural labour, policy changes, technologicaladvancements, transparency, governance and systems have been taken intoconsideration here by the policy makers.

Principally the structure, concept and philosophy of Co-operative Societies formedunder the Co-operative Societies Act, 1961 has been kept intact as a basicframework and then the same has been improvised. Provisions relating toconversion of the existing Co-operative Societies registered under various otherstatutes have been also incorporated so as to give an opportunity to the co-operative sector to corporatize itself.

The basis of this entire structure and system of co-operatives in India, takes usbehind atleast a 100 years from now. The Primary Agricultural Co-operative Society(PACS) is one of the oldest producer institutions in India. On the basis of the‘Principle of Co-operation’, there have been various structures which have evolvedlike Self-Help Groups, Common Interest Groups etc. The objective of co-operativeinstitutions, which the producer companies today have adhered to is not justearning profits but to help every member of such institutions and to share theprofits between the members of such institutions.

The co-operative institutions and societies work under the following cardinalprinciples :

(a) Democratic management – one vote for each member irrespective oftheir shareholdings.

2 FAQs ON PRODUCER COMPANIES

(b) Limited share in profits.

(c) The concept of mutual assistance.

(d) Co-operation and association with similar institutions

2. What is the basic working and management structure of Co-operativeInstitutions in India?

Co-operative Societies have been popularised due to the Co-operative Movementin India. These Organisations work on the Principles of Co-operation, Mutual aidand Assistance, protection of rights and interests of the Members of the Societyetc.

Typically Co-operative Societies have a Socialist and Populist agenda whileworking. An important aspect of this is that, as against Companies and Corporateforms of organisations, the Co-operative Societies have a Principle of “One HeadOne Vote” and not “One Share One Vote”. A typical Co-operative Society wouldhave members, owning shares in the institution, and a Management Board, likea Board of Directors in a Company. Certain other features of the Structure of a Co-operative Society can be outlined as follows :

Governing Statute Related Co-operative Societies enactments

Membership Open to all

Professionals on Board No Specific Provision to that effect

Area of Operations Restricted geographically

Relation with other entities: Only Transaction Based

Shares Not Freely Tradable

Member Stakes No linkage with number of Shares held

Voting Rights 1 Person 1 Vote, Registrar to have Veto Power

Reserves Optional to create, if profit is achieved

Profit Sharing Limited fixed Dividend

Government intervention Excessive and Significant

Disclosure and Audit Annual Report and Representation to regulatorRequirements

Borrowing Power Excessive Restrictions

Dispute Settlement Through Co-operative Court/Admin System

The members in a co-operative society are the same persons having resource

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contribution to the said Society. Example, in a Sugar Co-operative, the personswho have contributed either on land, capital, farm produce etc, are membershaving shares of the society.

These members elect a Management Committee or a Board like a Board ofDirectors in a company, which manages the day-to-day affairs of the Society.However the Registrar of Co-operative Societies is at the helm of the structure ofthe Society.

3. Explain in detail the concept of producer company as per the CompaniesAct?

The concept of producer companies was introduced in 2002 by incorporating anew Part IXA (Section 581A to 581ZT) into the Companies Act, 1956, (“the Act”)based on the recommendations of an expert committee led by an economist, Mr.Y. K. Alagh.

Reference Section 581 of Companies Act 1956- Provisions of Part IX A of theCompanies Act 1956 shall be applicable mutatis mutandis to producer companiesin the manner as if the Companies Act 1956 has not been repealed.

A producer company is a company incorporated under Companies Act 2013(formerly the Companies Act 1956) and shall carry on following activities asmentioned in section 581B of Companies Act 1956 :

• Production, harvesting, procurement, grading, pooling, handling,marketing, selling, export of primary produce of the Members or importgoods for their benefit

• Processing including preserving, drying, distilling, brewing, venting,canning and packaging of produce of its members

• Manufacture, sale or supply of machinery, equipment or consumablesmainly to its Members.

• Providing education on the mutual assistance principles to its Membersand others

• Rendering technical services, consultancy services, training, research anddevelopment and all other activities for the promotion of interest of itsmembers

• Generation, transmission and distribution of power, revitalisation of landand water resources, their use, conservation and communicationsrelatable to primary produce

• Insurance of producers or their primary produce

PRODUCER COMPANIES – AN OPTION TO FUNCTION CO-OPERATIVES AS COMPANIES


• Promoting techniques of mutuality and mutual assistance

• Welfare measures or facilities for the benefit of Members as may bedecided by the Board

• Any other activity, ancillary or incidental to any of the activities referred toin above clauses which may promote the principles of mutuality andmutual assistance amongst the Members in any other manner

• Financing of procurement, processing, marketing or other activitiesspecified in above clauses which include extending credit facilities or anyother financial services to its members

Over the period of time Producer Company has gained popularity due to thefollowing:

• Co-operatives have largely been state promoted, with a focus on welfarerather than to do business on commercial lines and more State governmentintervention in the management of Co-operatives.

• Whereas Companies Act is central legislation comparatively more liberaland minimal government control in the management of the Company.

• A Producer Company is hybrid of Company and Co-operative Society.

• It combines the goodness of a co-operative enterprise and vibrancy andefficiency of a company and accommodates the unique elements ofcooperative business with a regulatory framework similar to that of a company.

4. A producer company is governed under which law?

The formation and regulation of Producer Company is governed under theprovisions of Sections 581A to 581ZL of Companies Act, 1956, read with CompaniesAct, 2013, and the rules made thereunder.

5. Whether Producer Company is Private Company or Public Company?

As the name of the Company ends with Producer Company Limited it seems tobe a Public Company but as per clause (5) of the section 581C of Companies Act,1956, on registration the Producer Company shall become a body corporate as ifit is a Private Company and shall not under any circumstances deemed to be aPublic Company.

6. Whether the limit of 200 members is applicable to Producer Company?

As per clause (5) of the section 581C of Companies Act, 1956, the ProducerCompany shall become a body corporate as if it is a Private Company withouthowever any limit to the number of members.

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7. Who can be member in a Producer Company?

A person being a “producer” or a “producer institution” (whether incorporated ornot) can be admitted as member of Producer Company.

Here “Producer” means any person engaged in any activity or connected withor relatable to any primary produce and primary produce of farmer is defined asproduce of farmer arising from agriculture including animal husbandry,horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising and farming plantation products), or from any other primaryactivity or service which promotes the interest of the farmers or consumers orproduce of persons engaged in handloom, handicraft and other cottage industriesor any product resulting from any of the above activities, including by-products ofsuch products.

“Producer Institution” means a producer company or any other institution havingonly producer or producers or Producer Company or Producer Companies as itsmember whether incorporated or not having any of the objects referred to insection 581B and which agrees to make use of the services of the ProducerCompany or Producer Companies as provided in its articles.

8. What if a member of the producer company ceased to be a primaryproducer?

As per clause (5) of section 581ZD, where the Board of a Producer Company issatisfied that where the Board of a Producer Company is satisfied that the Boardshall direct the surrender of shares together with special rights, if any, to theProducer Company at par value or such other value as may be determined by theBoard.

Provided that the Board shall not direct such surrender of shares unless theMember has been served with a written notice and given an opportunity of beingheard.

9. What are the benefits derived by the members of producer companies?

Following benefits are derived by the members of producer companies:

• Subject to provisions made in articles, every member shall initially receiveonly such value for the produce or products pooled and supplied as theBoard of Producer Company may determine, and the withheld price maybe disbursed later in cash or in kind or by allotment of equity shares, inproportion to the produce supplied to the producer company during thefinancial year to such extent and in such manner and subject to suchconditions as may be decided by the Board.

PRODUCER COMPANIES – AN OPTION TO FUNCTION CO-OPERATIVES AS COMPANIES


• Every member shall, on the share capital contributed, receive only a limitedreturn provided that every such member may be allotted bonus shares inaccordance with the provisions contained in section 581ZJ.

• The surplus if any, remaining after making provision for payment of limitedreturn and reserves referred to in section 581ZI, may be disbursed aspatronage bonus, amongst the members, in proportion to their participationin the business of the producer company, either in cash or by way ofallotment of equity shares, or both, as may be decided by the members atthe general meeting.

10. What is the difference between a Producer Company, Private LimitedCompany and Public Limited Company?

S. Particulars Producer Private Limited Public LimitedNo. Company Company Company

1. No. of Any seven or more

Members Any ten or more Any two or more individuals orindividuals or two individuals or companies canor more Producer companies can form a PublicInstitutions or their form a Private Company

combinations can Companyform a ProducerCompany withoutany restriction on

maximum no. ofmembers.

2. Objects A Producer A Private Limited A Public Limited

company can be Company can be Company can beestablished for set up for any set up for any lawfulobjects specified lawful object. object.in section 581B

of the Act.

3. Name of A “Producer A “Private Limited” A “Limited” wouldCompany Company Limited” would form part form part of its

would form part of its name. name.of its name.

4. Cessation of A person ceases No specific No specific

membership to be a member of provisions are provisions areProducer company made for Private made for Public

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if Companies until Companies until

(a) he ceases to a occurrence of occurrence ofPrimary certain events eg. certain events eg.Producer buy back or buy back or

(b) he has any transfer of shares, transfer of shares,

business non-payment of non-payment ofinterest which allotment or call allotment or callis in conflict money, if member money, if memberwith the gets expired or gets expired or

business of insolvent, by the insolvent, by theProducer order of court etc. order of court etc.company.

5. No. of Every Producer Every Private Every Publicdirectors company shall company shall company shall have

have at least five have at least two at least three andand not more and not more not more than

than fifteen than fifteen fifteen Directors.Directors. Directors.

6. Number of Total Number of No such limit is No such limit is

additional or additional or expert prescribed for prescribed forexpert directors should not appointment of appointment ofdirectors exceed one fifth of additional or additional or expert

the total strength expert directors. directors. However

of the number of However total total number ofdirectors on the number of directors includingBoard. directors including additional directors

additional directors shall not exceed the

shall not exceed maximum strengththe maximum fixed for the Boardstrength fixed for after passingthe Board after special resolution.

passing specialresolution.

7. Vacation of The directors shall The directors shall The directors shall

office of vacate the office vacate the office vacate the office ondirectors on the grounds on the grounds the grounds

specified in section specified in specified in section581Q of the Act. section 167 of the 167 of the Act.

Act.


8. Appointment Every Producer Appointment of Appointment of

of whole company having whole time whole timetime an average Secretary is Secretary issecretary annual turnover mandatory for mandatory for

exceeding Rs.5 companies having companies having

Crore in each of paid up share paid up share3 financial years capital of Rs. 5 capital of Rs. 5shall appoint Crore. Crore.whole time

Company Secretary.

A producer company is thus a hybrid between a private limited company and acooperative society. It combines the goodness of a cooperative enterprise andthe vibrancy and efficiency of a company. It accommodates the unique elementsof cooperative business with a regulatory framework similar to that of a privatelimited company.

11. What are the tax benefits available to a Producer Company?

The Income Tax Act, 1961, (“the IT Act”) specifically exempts tax on agriculturalincome under Section 10(1). However, the exemption for such agricultural incomeshall sometimes vary depending upon the kind of agricultural activity carried on.

It is to be noted that though the IT Act does not per-se give any special benefits orexemptions to Producer Companies as such, but depending upon the kind ofagricultural activity it carries on, certain tax benefits can be availed.

Dividend tax at the applicable rates is required to be paid by the Company at thetime of patronage bonus, limited return distribution and the same will be tax freein the hands of the members.

Bonus shares will not attract any tax in the hands of the members at the time ofallotment, however at the time of sale or redemption necessary provision ofcapital gain tax shall apply.

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FORMATION AND REGISTRATIONOF PRODUCER COMPANY

1. How many members are required to form a Producer Company?

As per section clause (1) of section 581C of the Companies Act, 1956, any one ofthe following combination can form a Producer Company:

• Any ten or more individuals each of them being a producer

• Or any two or more Producer Institutions

• Or Combination of 10 or more individuals and Producer Institutions

2. What is the minimum number of directors required for formation ofProducer Company?

As per clause (1) of section 581O of the Companies Act, 1956, every producercompany shall have at least five and not more than fifteen directors provided inthe case of an inter-state co-operative society incorporated as a ProducerCompany, such company may have more than fifteen directors for a period ofone year from the date of its incorporation as a Producer Company.

3. Explain the procedure of incorporation of a Producer Company.

As the minimum numbers of members are more than 10, SPICE forms cannot beused for formation of Producer Companies. Producer Company is incorporatedthrough Form INC – 7, Form DIR – 12 and Form INC – 22.

(1) Application for DIN

• The Directors of the proposed Producer Company are required to applyfor DIN (Director Identification Number) in Form DIR – 3 by attachingprescribed documents.

• The DIN No. is valid for life time of applicant.

(2) Incorporation of Producer Company

(i) Application for reservation of name: The application for the reservationof the name is to be filed in Form INC-1 with DIN / PAN numbers of all 10proposed subscribers. Such name shall be available for reservation for aperiod of 60 days from the date of application made to Registrar.

Every Producer Company shall have the words “Producer CompanyLimited” as the last words of its name.


Criteria for name approval: The name of Producer Company should notbe undesirable as per rule 8 of Chapter II of Company Incorporation Rules.

(ii) Filing of Incorporation Document:

• The incorporation document is required to be filed in Form INC- 7,Form DIR – 12 and Form INC – 22.

• Form INC – 7, DIR – 12 and INC – 22 should state following details –

a. the name of the Producer Company;

b. Authorized and Subscribed Capital;

c. Particulars of all ten subscribers which were mentioned at thetime of filing form INC – 1. If there is any change in promotersubscribers No objection has to be attached

• Along with the incorporation document there shall be filedMemorandum of Association and Articles of Association alongwithsubscribers sheet,

• duly notarised Affidavit in Form INC – 9 of all subscribers,

• declaration in Form INC - 8, made by either an advocate, or aCompany Secretary or a Chartered Accountant or a Cost Accountant,who is engaged to give declaration under section 7 (1) (b) that all therequirements of this Act and the rules made thereunder have beencomplied with,

• PAN copies of all subscribers

• Aadhar Card / Driving License / Voter Id / Passport as proof of identity

• electricity Bill / mobile Bill / telephone Bill / bank Statement as proofof address

• proof of farming 7/ 12 extracts of Agricultural Land or certificatefrom District Tahsildar this is additional requirement (proof offarming will differ state to state)

• Consent to act as director in Form DIR – 2

• Electricity Bill of registered office address

• The Registrar may accept the statement (made by an Advocate/Company Secretary/ Chartered Accountant/Cost Accountant, whois engaged in the formation of the Company and by any one whosubscribed his name to the incorporation document, that all therequirements of this Act and the rules made thereunder have been

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complied with, in respect of incorporation and matters precedentand incidental thereto) as sufficient evidence that the requirementhas been complied with.

• The certificate shall be signed by the Registrar and authenticated byhis official seal.

• The certificate shall be conclusive evidence that the ProducerCompany is incorporated by the name specified therein.

4. Whether Table F of Articles of Association under Schedule I of CompaniesAct 2013 is applicable?

No, Table F of Articles of Association is not applicable to Producer Companies.However, the Articles of Association of a Producer Company shall include mutualassistance principles as mentioned in section 581G of Companies Act 1956.

5. Whether existing Inter-State Co-operative Societies can be registered asProducer Companies?

• As per Section 581J of the Companies Act, 1956, any Inter-State Co-operative Society with objects not confined to one State may make anapplication to the Registrar for registration as Producer Company underthis Part.

• Every application under sub-section (1) shall be accompanied by –

(a) a copy of the special resolution, of not less than two-third of totalmembers of inter-State co-operative society, for its incorporation asa Producer Company under this Act

(b) a statement showing names and address or the occupation of theDirectors and Chief Executive, if any, by whatever name called ofsuch co-operative and list of members of such co-operative

(c) a statement indicating that the Inter state co-operative society isengaged in any one or more of the objects specified in section B

• a declaration by two or more directors of the inter-State co-operative societycertifying that particulars given in clauses (a) to ( c ) are correct.

• When an inter-State co-operative society is registered as ProducerCompany the words “Producer Company Limited” shall form its namewith any word or expression to show its identity preceding it.

• A co-operative society formed by producers, by Federation or Union ofco-operative societies of producers or co-operatives of producers,registered under any law for the time being in force which has extended

FORMATION AND REGISTRATION OF PRODUCER COMPANY


its objects outside the State, either directly or through a union or federationof co-operatives of which it is a constituent, as the case may be, and anyFederation or Unions of such co-operatives, which has so extended anyof its objects or activities outside the State, shall be eligible to make anapplication under sub-section (1) and to obtain registration as a ProducerCompany under this Part.

• The inter-State co-operative society shall, upon registration under sub-section (1), stand transformed into a Producer Company, and there-aftershall be governed by the provisions of this Part to the exclusion of the lawby which it was earlier governed, save in so far as anything done oromitted to be done before its registration as a Producer Company, andnotwithstanding anything contained in any other law for the time being inforce, no person shall have any claim against the co-operative institutionor the company by reason of such conversion or transformation.

• Upon registration as a Producer Company, the Registrar of Companieswho registers the company shall forthwith intimate the Registrar with whomthe erstwhile inter-State co-operative society was earlier registered forappropriate deletion of the society from its register.

• As per section 581K, every shareholder of the inter-State co-operativesociety immediately before the date of registration of Producer Company(hereafter referred to as the transformation date) shall be deemed to beregistered on and from that date as a shareholder of the Producer Companyto the extent of the face value of the shares held by such shareholder.

• As per Section 581L, all the properties, assets, liabilities, rights, debts,money dues or contracts, suits, subsidies, grants shall stand transferredto Producer Company.

As per Companies Act 2013, Inter State Co-operative has to make an applicationin Form URC-1 as per the provisions of Section 366 of Companies Act, 2013, toget it registered under Part I of this Chapter.

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MANAGEMENT AND ADMINISTRATIONOF PRODUCER COMPANIES

1. Elaborate on the aspect of management of Producer Companies.

Principally, a Producer Company being a Company, a body corporate in itself, theaspect of management and ownership is differentiated by the statute itself.

The Management of the Producer Company is vested in the Board of Directorsand the ownership of the Company is vested in the Shareholders/Members. TheBoard of Directors in a Producer Company manage and operate the day to dayaffairs of the Company. An additional post of a Chief Executive is provided for asa linkage in the said Producer Company.

A Producer Company shall have the liability of its Members limited and canneither be limited by guarantee with or without share capital nor unlimited liabilitycompanies.

2. How is a director appointed in a Producer Company?

As per Section 581P of the Companies Act, 1956, save as provided in section581N, the Members who sign the memorandum and the articles may designatetherein the Board of directors (not less than five) who shall govern the affairs ofthe Producer Company until the directors are elected in accordance with theprovisions of this section.

The election of directors shall be conducted within a period of ninety days ofthe registration of the Producer Company.

Above provision needs clarification and needs to be aligned with existingprovisions of Chapter of “Appointment and Disqualification of Directors” underCompanies Act 2013.

Reasons – As per current procedure of formation of Companies, First Directorsare already mentioned in Articles of Association and also Form DIR – 12 withconsent to act as Directors in Form DIR – 2 is filed with Registrar at the time ofIncorporation and thus the First Directors are already appointed.

There is no point in taking elections within 90 days of the Registration of Companyfor Appointment of Directors.

3. What are the circumstances for vacation of office by director?

As per section 581Q of the Companies Act, 1956, the office of director of ProducerCompany shall become vacant if:


(a) he is convicted by a Court of any offence involving moral turpitude andsentenced in respect thereof to imprisonment for not less than six months

(b) the Producer Company in which he is director has made default inrepayment of any advances or loans taken from any company or institutionor any other person and such default continues for ninety days

(c) he has made a default in repayment of any advances or loans taken fromthe Producer Company in which he is a director

(d) the Producer Company, in which he is a director-

(i) has not filed the annual accounts and annual return for any continuousthree financial years commencing on or after the 1st day of April,2002 ; or

(ii) has failed to, repay its deposit or withheld price or patronage bonusor interest thereon on due date, or pay dividend and such failurecontinues for one year or more

(e) default is made in holding election for the office of director, in the ProducerCompany in which he is a director in accordance with the provisions ofthis Act and articles

(f) the annual general meeting or extraordinary general meeting of theProducer Company, in which he is a director, is not called in accordancewith the provisions of this Act except due to natural calamity or such otherreason

The above provisions shall, as far as may be, apply to the director of a Producerinstitution which is a member of a Producer Company.

Above provisions need to be aligned as per section of 164 of the Companies,2013, in clause (d)(i) of the above provisions it is mentioned the office of Directorshall become vacant if the Producer Company in which he is director has not filedthe annual accounts and annual return for any continuous period of three financialyears.

As per section 164(2)(a) of the Companies, 2013, a person shall not be eligible forappointment as Director of a Company if he has not field financial statements orannual return for continuous period of the three financial years.

In first instance director will be disqualified if he has not filed both annual accountsand annual return for a period of continuous three in financial years and insecond instance he is disqualified if either of financial statement or annual returnare not filed for a continuous period of three financial years.

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4. What are the powers and functions of the Board of Directors of a ProducerCompany?

The Board of directors of Producer Company shall do all such acts and things andexercise all such powers as is authorised by the Articles and by the provisions ofthis Act.

Certain powers which shall be exercised by the Board of Directors of ProducerCompany are:

• day to day management functions of the Producer Company such asformulation of the organisational policies & objectives including long-term and annual objectives,

• formulation of corporate strategies and financial plans;

• determination of the dividend payable;

• determination of the quantum of withheld price and recommendation ofpatronage Bonus; admission of new Members;

• appointment of officers of the Producer Company including Chief Executive,Company Secretary & exercise of superintendence, direction and controlover Chief Executive and other officers appointed;

• maintenance of books of accounts;

• preparation of annual accounts to be placed before the annual generalmeeting with the auditor’s report and the replies on qualifications, if any,made by the auditors;

• acquisition or disposal of property in the ordinary course of business ofProducer Company;

• investment of the funds in the ordinary course of business ;

• sanction any loan or advance to any Member not being a director or hisrelative ;

• such other measures as may be required in the discharge of functions orexercise of powers.

All the above mentioned powers shall be exercised by means of resolutionpassed at the Board. The persons who are not in the Board shall not exercise anyof the above mentioned powers. Therefore the ex officio directors like ChiefExecutive Officer cannot exercise above powers.

The Board of Directors of Producer Company cannot transact business reservedfor General Body as mentioned u/s 581S.

MANAGEMENT AND ADMINISTRATION OF PRODUCER COMPANIES


5. What is the Liability of the Directors in a Producer Company?

Liabilities of directors in a Producer Company:

• Section 581T of the Companies Act, 1956, provides that any contraventionof the provisions of this Act or any other law or provisions of articles, doneby the directors of Producer Company, either by way of voting on a resolutionor approving by any other means, shall make such directors either jointlyor severally liable towards the Producer Company to make good any lossor damage suffered by such Company.

• In all such cases, the Producer Company shall have the right to recoverfrom its directors and if such director has made any profit (with ill intention),the Producer Company shall have the right to recover an amount equal tosaid profits from such directors and if in case of a loss or damage anamount equal to that loss or damage.

• The liability so imposed shall be in addition to and not in derogation of aliability imposed under this Act or any other law for the time being in force.However all acts done by the directors in the general interest of thecompany and its members and in accordance with the provisions ofMemorandum, Articles and provisions of this act and loss or damage, ifany suffered by company, then such loss or damage shall not beconsidered as personal liability of the directors and they shall not berequired to make good such loss or damage.

• There can be various Committees of Directors which can be formed as ameans of improving board effectiveness and efficiency, in areas wheremore focused, specialised and technical discussions are required. Therecommendation of the committee has to be approved by the Board.

• Section 581U of the Companies Act, 1956, states that the Board mayconstitute such number of committees as it may deem fit for the purposesof assisting the Board in efficient discharge of its functions. However, theBoard of directors shall not delegate any of its powers or assign the powersof the Chief Executive, to any committee of directors.

• Every such committee may with the approval of the Board, co-opt suchnumber of persons, as it deems fit, as the members of the committee.However in every such committee the Chief Executive appointed underSection 581W or a director of Producer Committee shall be a member.

• Every such committee shall be subject to general superintendence,direction and control of the Board. The Board may decide the duration,functioning and the fees and allowances to be paid to the members of the

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committee. The minutes of every Committee meeting shall be placedbefore the next Board meeting.

4. Whether appointment of Chief Executive is mandatory?

Yes, as per Section 581W of the Companies Act, 1956, every Producer Companyshall have a full time Chief Executive, by whatever name called, to be appointedby the Board from amongst persons other than Members.

The Chief Executive shall be ex officio director of the Board and such director shallnot retire by rotation.

In the above section 581W, time period within which a Producer Company shallcomply with the provisions of appointment of Chief Executive is not mentioned,as per general practice we should comply it before closure of first financial yearas in Form MGT – 7 we have to mention whether Company has complied with allthe provisions of Companies Act or not.

5. Who is the Chief Executive of a Producer Company?

The Chief Executive Officer shall be an ex-officio director and shall not retire byrotation.

The qualifications, experience and the terms and conditions of Chief ExecutiveOfficer shall be such as may be determined by the Board subject to theprovisions contained in the Articles. The chief executive, who shall be entrustedwith substantial powers of the management, shall manage the affairs of theProducer Company but subject to the superintendence, direction and controlof the Board and is accountable to the Board for the performance of theProducer Company.

Unless the articles otherwise provide to the contrary, the Chief Executive Officerneed not be a Producer.

6. What are the powers and functions of Chief Executive?

The Chief Executive shall be entrusted with substantial powers of managementand may exercise powers and discharge the following functions:

(a) do administrative acts of a routine nature including managing the day-to-day affairs of the Producer Company

(b) operate bank accounts or authorise any person, subject to the general orspecial approval of the Board in this behalf to operate the bank account

(c) make arrangements for safe custody of cash and other assets of theProducer Company



(d) sign such documents as may be authorised by the Board, for and onbehalf of the company

(e) maintain proper books of account ; prepare annual accounts and auditthereof ; place the audited accounts before the Board and in the annualgeneral meeting of the Members

(f) furnish Members with periodic information to appraise them of theoperation and functions of the Producer Company

(g) make appointments to posts in accordance with the powers delegated tohim by the Board

(h) assist the Board in the formulation of goals, objectives, strategies, plansand policies

(i) advise the Board with respect to legal and regulatory matters concerning theproposed and on going activities and take necessary action in respect thereof

(j) exercise the powers as may be necessary in the ordinary course ofbusiness

(k) discharge such other functions, and exercise such other powers, as maybe delegated by the Board

7. Whether appointment of Company Secretary is applicable to ProducerCompany?

As per Section 581K of the Companies Act, 1956, every Producer Company havingan average annual turnover exceeding five crore rupees in each of threeconsecutive financial years shall have a whole-time secretary.

No individual shall be appointed as whole-time secretary unless he possessesmembership of the Institute of Company Secretaries of India constituted underthe Company Secretaries Act, 1980.

Clarification needed from MCA as in the above section appointment of CompanySecretary is based on average annual turnover of the Company of precedingthree consecutive financial years whereas Section 203 of Companies Act,2013, states every company whose paid-up capital is 5 crores or more need toappoint a Whole time Company Secretary in Employment.

8. Whether Producer Companies can appoint Committees?

The Board may constitute such number of committees as it may deem fit for thepurpose of assisting the Board in the efficient discharge of its functions providedthat the Board shall not delegate any of its powers or assign the powers of theChief Executive, to any committee.

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A committee constituted under with the approval of the Board, co-opt such numberof persons as it deems fit as members of the committee provided that the ChiefExecutive appointed under section 581W or a director of the Producer Companyshall be a member of such committee.

The Chief Executive appointed under section 581W or a director of the ProducerCompany shall be a member of such committee.

The fee and allowances to be paid to the members of the committee shall besuch as may be determined by the Board.

The minutes of each meeting of the committee shall be placed before the Boardat its next meeting.

9. How many Board Meetings shall held in a financial year?

As per section 581V of the Companies Act, 1956, meetings of the Board shall beheld not less than once in every three months and at least four such meetingsshall be held in every year.

Above provisions need clarification and need to be aligned with Section 173 ofCompanies Act, 2013 and Secretarial Standard I, as per Secretarial Standard Iread with Companies Act, 2013, every company shall hold 4 Board meetings in acalendar year and gap between 2 Board Meetings shall not be more than 120days, in case of one person company and small company are required to holdone Board Meeting in each of calendar year and gap between 2 Board Meetingsshall not be less than 90 days.

10. What are the provisions with respect to Annual General Meeting forProducer Company?

As per section 581ZA of the Companies Act, 1956, every Producer Company shallin each year, hold, in addition to any other meetings, a general meeting, as itsannual general meeting and shall specify the meeting as such in the noticescalling it, and not more than fifteen months shall elapse between the date of oneannual general meeting of a Producer Company and that of the next.

The Registrar may, for any special reason, permit extension of the time for holdingany annual general meeting (not being the first annual general meeting) by aperiod not exceeding three months.

A Producer Company shall hold its first annual general meeting within aperiod of ninety days from the date of its incorporation.

Above clause 2 of Section 581ZA states that the first Annual General Meetingshall be held within a period of 90 days from the date if its incorporation which isdifferent from existing Companies Act 2013.



As per section 96 of Companies Act, 2013, first Annual General Meeting shallheld within 9 months of close of first financial year.

11. What is the business to be transacted in First Annual General Meeting ofthe Producer Company?

The members shall adopt the articles of the Producer Company and appointdirectors of its Board in the Annual General Meeting.

The Ministry may consider deletion of clause 2 of section 581ZA and aligned withclause 1 of section 96 of Companies Act 2013 where clause 1 states that the firstAnnual General Meeting of the Company shall be held within 9 months of theclosure of first financial year.

Justification with practical difficulty is briefed hereunder:

Business to be transacted at the first Annual General Meeting, i.e. Adoption ofArticles of Association, as per the procedure followed under Companies Act2013, the Articles are already subscribed by the proposed promoters at the timeof incorporation and said subscribed articles are attached in Form INC – 7.

Adopting already subscribed Articles in the Annual General Meeting by the samepersons is of no use and redundancy of procedure.

Secondly the provision says about appointment of Directors, as per the procedureof formation of Companies under Companies Act, 2013, First Directors are alreadymentioned in Articles of Association which are already subscribed by all thepromoters and also Form DIR – 12 with consent to Act as Directors in Form DIR –2 is filed with Registrar at the time of Incorporation and thus this Directors arealready appointed.

Appointing already appointed Directors in the first Annual General Meetings isagain redundancy of procedure.

i) Appointment of First Auditors – As per clause 6 of section 139 first Auditorsshall be appointed by the Board of Directors within 30 days from the dateof its incorporation and such auditor shall hold office till the conclusion ofFirst Annual General Meeting.

So in case of a Producer Company the term of first Auditor shall be only of90 days as the producer company has to hold its first Annual GeneralMeeting in 90 days from the date of its incorporation. So if we go by theprovisions of 581ZA then an auditor has to be again appointed in that FirstAnnual General Meeting or will he continue to be the Auditor till the end offinancial year is a part of confusion.

ii) Case 1 say a Company is incorporated on 25th December 2016 and as per

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the provisions of the Companies Act 2013, the Company has to end itsfinancial year on 31st March 2017.

In above case as per Clause 2 of 581ZA Company has to hold its firstannual general meeting within 90 days, lets say company held its FirstAnnual General Meeting on 20th March 2017, but within a period 6 monthsCompany has to again hold its Annual General Meeting before 30th

September for Adoption Accounts of first financial year. It cannot takebenefit of taking Annual General Meeting within 9 months as per thesection 96 of Companies Act as practically this will be second AnnualGeneral Meeting of the Company.

iii) Case 2 say a Company is incorporated on 05th January 2016 and as perprovisions of Companies Act 2013 the Company has to end its financialyear on 31st March 2017.

In above case as per Clause 2 of 581ZA Company has to hold its firstannual general meeting within 90 days, lets say company held its FirstAnnual General Meeting on 28th March 2016, but in this case the Companyhas to hold its Annual General Meeting for adoption of Accounts of the firstfinancial year ending in 31st March 2017 by 28th June 2017 as the actsstates that there shall not be a gap of more than 15 months between thetwo Annual General Meetings.

Again in above case going through the Act the Company has to finalisedaccounts by May and lay it before Shareholders by June as it cannot takebenefit of taking Annual General Meeting within 9 months as per thesection 96 of Companies Act as practically this will be second AnnualGeneral Meeting of the Company.

Citing above practical difficulties and confusion which leads to diversepractices followed by professional Ministry should re-consider theprovisions and necessary changes shall be made in the Act.

There is some practical difficulty arising while working with ProducerCompanies with regard to Allotment of Shares. The Ministry may considerfor the clarification in this regard.

Producer Companies are getting government assistance under various schemes,such as SFAC Equity grant scheme, SFAC Venture capital scheme, MACP scheme(Maharashtra), Nabard Finance Scheme, but in all above schemes minimummembers required for eligibility are 50, 500, 350 and 250 respectively.

Now the problem arises as in section 581 there is no provisions w.r.t the allotmentof shares, we have to follow procedure ,mentioned in section 42 of Companies



Act 2013 for private placement, which itself is very lengthy and impracticable inabove case. As minimum application size shall be of Rs.20000/- and further wecannot allot shares above 49 members in a single meeting and further we cannotallot more than 200 members in a financial year.

Means if a company has to avail a venture capital of SFAC it has to hold 10 BoardMeetings in 2.5 year and allot shares to 49 persons in each meeting then onlythen they will be eligible, so it’s not practicable to hold 10 Board meeting whichwill be very costly to the Company, further farmers are already very much low infinance so how can a farmer take minimum shares of Rs.20000.

Probable solution for the above problem:- As there is a exemption notification forNIDHI Companies wherein they have exempted NIDHI companies from Section42(2) Explanation (1), 42(3), 42(5), 42(7) (Private Placement) such exemptions alsoshall be granted to PRODUCER COMPANIES so that they will not face aboveproblems.

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SHARE CAPITAL AND MEMBERS RIGHTS

1. What are the types of shares which producer Company can issue?

As per section 581ZB of the Companies Act, 1956, the share capital of a ProducerCompany shall consist of equity shares only.

The shares held by a Member in a Producer Company, shall as far as may be, inproportion to the patronage of that company.

Here “patronage” means the use of services offered by the Producer Companyto its Members by participation in its business activities.

“Patronage bonus” means payments made by a Producer Company out of itssurplus income to the Members in proportion to their respective patronage.

2. Can a Producer Company give some special rights to the members of theCompany?

The producers, who are active Members may, if so provided in the articles, havespecial rights and the Producer Company may issue appropriate instruments tothem in respect of such special rights.

The instruments of the Producer Company issued shall, after obtaining approvalof the Board in that behalf, be transferable to any other active Member of thatProducer Company.

Explanation. - For the purposes of this section, the expression “special right”means any right relating to supply of additional produce by the active Member orany other right relating to his produce which may be conferred upon him by theBoard.

3. Whether shares of Producer Companies are transferable?

A Member of a Producer Company may, after obtaining the previous approval ofthe Board, transfer the whole or part of his shares along with any special rights, toan active Member at par.

Here “active members” means a member who fulfils the quantum and period ofpatronage of the Producer Company as may be required by the articles.

In the above provision there is one practical difficulty as if there are only 10members as required by the Act and if one of them wants to transfer his sharesand as the above provision suggest that the shares can be transferred only toactive member, whether an outsider incoming member can be termed as an


active member is the question and if he transfers his shares to existing membersthen minimum requirement of members will fall below which is again a default.

Probable resolution – the provision of obtaining previous approval of the Boardfor transfer of shares shall be kept as it is only the word transfer to active membersshall be interchanged with Producer.

4. Whether the members of the Producer Company can appoint nominee?

Every Member shall, within three months of his becoming a Member in theProducer Company, nominate, in the manner specified in articles, a person towhom his shares in the Producer Company shall vest in the event of his death.

The nominee shall, on the death of the Member, become entitled to all the rightsin the shares of the Producer Company and the Board of that Company shalltransfer the shares of the deceased Member to his nominee.

In a case where such nominee is not a producer, the Board shall direct thesurrender of shares together with special rights, if any, to the Producer Companyat par value or such other value as may be determined by the Board.

5. How are the voting rights of members determined in Producer Companies?

The voting rights are determined as follows:

• In a case where the membership consists solely of individual members,the voting rights shall be based on a single vote for every Member,irrespective of his shareholding or patronage of the Producer Company.

• In a case where the membership consists of Producer institutionsonly, the voting rights of such Producer institutions shall be determinedon the basis of their participation in the business of the Producer Companyin the previous year, as may be specified by articles.

Provided that during the first year of registration of a Producer Company,the voting rights shall be determined on the basis of the shareholding bysuch Producer institutions.

• In a case where the membership consists of individuals and Producerinstitutions, the voting rights shall be computed on the basis of a singlevote for every Member.

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ACCOUNTS, AUDIT, LOANSAND INVESTMENTS

1. What are the requirements with respect to Internal Audit for ProducerCompanies?

As per section 581ZF of the Companies Act, 1956, every Producer Company shallhave internal audit of its accounts carried out, at such interval and in such manneras may be specified in articles, by a chartered accountant as defined in clause (b)of sub-section (1) of section 2 of the Institute of Chartered Accountants Act, 1949.

As per Section 138 of Companies Act, 2013, has widened the term of InternalAudit, any professional like a Chartered Accountant, Cost Accountant, CompanySecretary or Advocate can be appointed as Internal Auditor whereas as persection 581ZF of the Companies Act, 1956, internal audit of Producer Companycan be carried out only by a Chartered Accountant.

Clarification- If in future above criteria mentioned as per Section 138 of CompaniesAct, 2013, is made applicable to the Producer Companies most of the Companieswould be exempted from carrying out Internal Audit.

2. What are the duties of an Auditor?

The auditor shall report on the following additional matters relating to the ProducerCompany, namely:

(i) the amount of debts due along with particulars of bad debts if any

(ii) the verification of cash balance and securities

(iii) all transactions which appear to be contrary to the provisions of this Part

(iv) the loans given by the Producer Company to the directors

(v) the donations or subscriptions given by the Producer Company

(vi) any other matter as may be considered necessary by the auditor

3. Whether Producer Companies can make donations or subscriptions?

As per sections 581ZH of the Companies Act, 1956, a Producer Company may, byspecial resolution, make donation or subscription to any institution or individualfor the purposes of:

a) promoting the social and economic welfare of Producer Members orproducers or general public


b) promoting the mutual assistance principles

The aggregate amount of all such donation and subscription in any financial yearshall not exceed three per cent of the net profit of the Producer Company in thefinancial year immediately preceding the financial year in which the donation orsubscription was made.

No Producer Company shall make directly or indirectly to any political party or forany political purpose to any person any contribution or subscription or makeavailable any facilities including personnel or material.

5. Whether Producer Companies are required to transfer any funds to generalreserves?

Every Producer Company shall maintain a general reserve in every financialyear, in addition to any reserve maintained by it as may be specified in articles.

In a case where the Producer Company does not have sufficient funds in anyfinancial year for transfer to maintain the reserves as may be specified in articles,the contribution to the reserve shall be shared amongst the Members in proportionto their patronage in the business of that company in that year.

6. Can Producer Companies advance Loans or provide for financial assistanceor credit facilities to its members?

As per Section 581ZK of the Companies Act, 1956, the Board may, subject to theprovisions made in articles, provide financial assistance to the Members of theProducer Company by way of:

a) credit facility, to any Member, in connection with the business of theProducer Company, for a period not exceeding six months

b) loans and advances, against security specified in articles to any Member,repayable within a period exceeding three months but not exceedingseven years from the date of disbursement of such loan or advances :

Further, any loan or advance to any director or his relative shall be granted onlyafter the approval by the Members in general meeting.

Comparison with Companies Act, 2013:

Above provisions are in respect of loan to directors, their relatives and members,when the above provisions were enacted, Section 295 of Companies Act, 1956,was not applicable to private companies, but in current scenario Section 185 ofCompanies Act, 2013, is applicable to private companies (Read with exemptionnotification for Private Companies dated 05th June 2015).

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7. Elaborate the aspect of investment by the Producer Company in otherCompanies, Formation of Subsidiaries etc.

Investment by the Producer Company in other Companies, Formation ofSubsidiaries etc.:

(i) As per Section 581ZL of the Companies Act, 1956, the general reserves ofany Producer Company shall be invested to secure the highest returnsavailable from approved securities, fixed deposits, units, bonds issued bythe Government or co-operative or scheduled bank or in such other modeas may be prescribed.

(ii) Any Producer Company may, for promotion of its objectives acquire theshares of another Producer Company.

(iii) Any Producer Company may subscribe to the share capital of, or enterinto any agreement or other arrangement, whether by way of formation ofits subsidiary company, joint venture or in any other manner with anybody corporate, for the purpose of promoting the objects of the ProducerCompany by special resolution in this behalf.

(iv) Any Producer Company, either by itself or together with its subsidiaries,may invest, by way of subscription, purchase or otherwise, shares inany other company as in point (ii) , other than a Producer Company, orsubscription of capital as in point (iii), for an amount not exceeding thirtyper cent of the aggregate of its paid-up capital and free reserves

(v) A Producer Company may, by special resolution passed in its generalmeeting and with prior approval of the Central Government, invest inexcess of the limits specified in this section.

(vi) All investments by a Producer Company may be made if such investmentsare consistent with the objects of the Producer Company.

(vii) The Board of a Producer Company may, with the previous approval ofMembers by a special resolution, dispose of any of its investments referredto in points (iii) and (iv).

(viii) Every Producer Company shall maintain a register containing particularsof all the investments, showing:

the names of the companies in which shares have beenacquired,

number and value of shares ;

ACCOUNTS, AUDIT, LOANS AND INVESTMENTS


the date of acquisition ; and

the manner and price at which any of the shares have beensubsequently disposed of

(ix) The register shall be kept at the registered office of the Producer Companyand the same shall be open to inspection by any Member who may takeextracts therefrom.

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